Monday, July 14, 2008

Possible outcomes after the Aug 1 shareholder meeting


Henry has a good post on why the latest MSFT offer sucks. The cash dividend part is appealing to Icahn because it will reduce his risk and lower his cost basis.

As Henry rightly pointed out in the latest post, if Icahn wins, MSFT has more leverage and I believe that the deal could go as low as ~$27 or even lower. That may still be acceptable to Icahn because he would make about 10% profit for all his efforts. Chances of a quick deal are high in this case. YHOO stock may get a short term bump on this outcome. I think MSFT may even decide to play hardball and try to squeeze Icahn, based on its behavior and tactics so far. So this can't be good outcome for long term holders of YHOO.

In the alternative scenerio, if Yang wins, I don't see him being desperate to sell, since he has a full year to prove himself. He may want to give GOOG deal a chance, while he improves the financials of YHOO. So the chances of a quick deal go down significantly. The deal would then happen closer to ~$33 and will depend on how desperate MSFT is at that point. I think YHOO wouldn't back off from their current offer of $33, and may not try to bid up the price. The discussion may be more on cash-stock split, valuation guarantees, regulatory issues etc. Since there is more uncertainty with this outcome, YHOO stock may go back under $20, immediately after the shareholder meeting. But long term holders of YHOO won't be fazed by this.

The third possibility that MSFT acquires all of YHOO, before Aug1st seems very unlikely to me, because of the bad blood between both the parties. Icahn seems to be on a defensive here. In his latest filing he admits that MSFT is no longer interested in full acquisition and also is looking to postpone the shareholder meeting. So YHOO seems to have an upper hand here

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